Three charts show how the government protects bank account accounts

How the FDIC is able to guarantee money for Silicon Valley Bank and Signature Bank account holders, and how it limits bank failure contagion effects.

FDIC’s Deposit Insurance Fund covers the full guarantee of depositors money. This pool is supported by fees that financial institutions routinely pay. FDIC requires banks contribute to the Deposit Insurance Fund, which can be used for compensating depositors up until its $250,000 limit.

If regulators consider a bank insolvent to be “systemically important”, which they did regarding Signature and SVB over the past week, then its depositors may be paid for any balances that exceed that limit. In the history of the program, the insurance cap was raised several times, including during the 2008 financial crisis.

Yellen was asked Thursday to clarify whether the government would support all bank customers whose funds exceed $250,000 of the FDIC’s limit. This is after it did for Signature and SVB.

Her response was that a bank can only get this treatment if it meets certain criteria, which indicate a potential systemic risk of a bank’s collapse. She cautioned that depositors at other banks might not get the same protections and that the FDIC’s $250,000 standard continues to apply.

The Deposit Insurance Fund isn’t funded by taxpayer money. Therefore, the Biden administration has claimed that the backstop doesn’t constitute a bailout.

The exception for systemic risks has been used before. The federal government invoked it in 2008 to deal with the mortgage crisis that threatened several large U.S banks.

Isaac Boltansky is an analyst at BTIG and stated it in a note to clients. The systemic risk exception “appears” to be the clear break in case emergency’ option for policymakers.

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